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ACC: Weak demand dents profits
Jul 25, 2013

ACC has announced its results for the second quarter of the calendar year 2013 (2QCY13). During the quarter ended June 2013, the company's standalone sales increased marginally by 1.4% YoY while net profits dropped by 38% YoY. Here is our analysis of the results:

Performance summary
  • On a standalone basis, net sales increase marginally by 1.4% YoY during the quarter.
  • Operating profits decline by 31.3% YoY due to higher costs.
  • Operating margins contract from 22.9% in 2QCY12 to 15.5% in 2QCY13.
  • Other income rises by 33.2% YoY, while interest expenses decrease by 40.6% YoY.
  • Net profits dip by 38% YoY on account of muted sales and weak operating performance.
  • The company's board of directors has approved an interim dividend of Rs 11 per share for the calendar year 2013.

Standalone financial performance snapshot
(Rs m) 2QCY12 2QCY13 Change 1HCY12 1HCY13 Change
Net sales 27,576 27,952 1.4% 56,006 57,063 1.9%
Expenditure 21,270 23,617 11.0% 43,712 48,260 10.4%
Operating profit (EBITDA) 6,306 4,335 -31.3% 12,294 8,803 -28.4%
EBITDA margin 22.9% 15.5%   22.0% 15.4%  
Other income 1,360 908 -33.2% 2,480 2,383 -3.9%
Depreciation 1,356 1,387 2.3% 2,662 2,770 4.1%
Interest 301 179 -40.6% 617 287 -53.5%
Profit before tax & exceptional items 6,009 3,677 -38.8% 11,496 8,129 -29.3%
Exceptional gain/ (loss) - -   (3,354) -  
Profit before tax 6,009 3,677 -38.8% 8,142 8,129 -0.2%
Tax 1,829 1,086 -40.6% 2,409 1,161 -51.8%
Effective tax rate 30.4% 29.5%   29.6% 14.3%  
Profit after tax 4,179 2,591 -38.0% 5,733 6,968 21.5%
Net profit margin 15.2% 9.3%   10.2% 12.2%  
No of shares (m) 187.7 187.7   187.7 187.7  
Diluted EPS (Rs)*         63.1  
P/E (times)         18.8  
*trailing twelve month earnings

What has driven performance in 2QCY13?
  • On a standalone basis, ACC's net sales rose marginally by 1.4% YoY during the quarter ended March 2013 driven by 1.2% YoY increase in cement sales volumes to 6.12 m tonnes.

  • On the cost front, most major cost heads such as raw material costs, employee expenses and other expenses increased by 6.4% YoY, 1.2% YoY and 0.4% YoY respectively (as a percentage of net sales). However, power & fuel expenses declined by 0.7% YoY (as a percentage of net sales). Operating margins contracted from 22.9% in 2QCY12 to 15.5% in 2QCY13.

    Operating cost break-up
    (Rs m) 2QCY12 2QCY13 Change
    Raw materials consumed 3,268 4,112  
    Purchases of stock-in-trade 352 613  
    Change in inventory (673) 55  
    Total raw materials cost 2,948 4,780 62.1%
    % of net sales 10.7% 17.1%  
    Employee expenses 1,356 1,722 27.0%
    % of net sales 4.9% 6.2%  
    Power & fuel expenses 6,039 5,912 -2.1%
    % of net sales 21.9% 21.1%  
    Freight & forwarding expenses 5,679 5,776 1.7%
    % of net sales 20.6% 20.7%  
    Other expenses 5,249 5,429 3.4%
    % of net sales 19.0% 19.4%  
    Total operating expenditure 21,270 23,617 11.0%
    % of net sales 77.1% 84.5%  

  • Other income decreased by 33.2% YoY during 2QCY13. While depreciation charges increased by 2.3% YoY, interest expenses decreased by 40.6% YoY.

  • At the bottomline level, net profits dropped by 38% YoY. Net profit margins contracted from 15.2% in 2QCY12 to 9.3% in 2QCY13.

  • The company's board of directors has declared an interim dividend of Rs 11 per share (face value Rs 10 per share) for the calendar year 2013.

What to expect?

Poor market conditions and early onset of monsoon impacted ACC's performance during the quarter. Owing to the overall slowdown in the housing and infrastructure sector, the outlook for the cement sector for the short to medium term remains subdued. However, we expect the sector to grow at about 7% over the next few years driven by demand for housing and infrastructure in the country.

On July 24, 2013, Swiss-based parent firm Holcim announced a restructuring plan for its Indian subsidiaries Ambuja Cements and ACC. As per the proposal, Ambuja would buy 24% stake in Holcim India Pvt Ltd for Rs 35 bn in cash. For the balance 76% stake, it would issue 584 million shares to parent firm Holcim. Thereby, Holcim India Pvt Ltd would be amalgamated with Ambuja and its 9.8% stake in Ambuja would get cancelled. Consequently, Holcim's shareholding in Ambuja would increase to 61.39%, while Holcim India's 50.01% stake in ACC would be taken over by Ambuja. As per the company's presentation, the Holcim India/ Ambuja swap ratio has been determined at 7.4. The derived swap ratio for Ambuja/ ACC stands at 6.6. Through this restructuring deal, Ambuja Cements would become the flagship company of Holcim's Indian operations. The transaction is likely to be completed by the second or third quarter of calendar year 2014, subject to various approvals. The company has also informed about its intention to acquire upto 10% additional stake in ACC without triggering a mandatory open offer. The restructuring deal will not cause any cash outflow or equity restructuring for ACC.

As per the company's management, the restructuring deal would result in operational gains for both ACC and Ambuja. One major benefit would be the optimization of the supply chain whereby both the companies would swap clinker and cement. Secondly, it would result in reduction of certain fixed costs owing to shared services as well facilitate better procurement. The synergies are expected to result in benefits of upto Rs 9 bn (US$ 150 million) over the next two years. It must be noted that both companies will continue to operate as listed entities with their existing brands and marketing teams.

At the current prices of Rs 1,187 the stock is trading at 18.8 times its trailing twelve month standalone earnings. We had recommended a 'Buy' on ACC in our StockSelect dated May 31, 2013. Given that the restructuring deal has no negative impact on ACC, we continue to maintain our 'Buy' view on the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also, within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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